Digital Banks - Value Propositions

There is little doubt that mobile is an increasingly popular channel to manage finances as 2018 saw 61% of smartphone owners in Europe using mobile banking apps, an increase from 2017’s 48%. Therefore, it comes as no surprise that tech-focused start-ups are also attempting to offer a more streamlined, mobile-focused experience.

In this blog we will look at some of the most successful FinTechs within the European digital banking space, where currently Monzo, N26, Revolut, Starling and TransferWise appear to stand out from the crowd. Later, we will try and get to the bottom of these banks’ business models but first, let us have a closer look at their value proposition.

Product offering

All five FinTechs profiled have started with a specialised offering, whether that be international money transfers (e.g. Transferwise), a prepaid card (e.g. Monzo), or a current account (e.g. Starling); and have since expanded their offering to more closely resemble that of traditional players, including the addition of business accounts in the case of players such as Starling and N26. Although the start-ups began with different product portfolios, over time, they have become increasingly similar.

All five providers offer current accounts and international money transfers, with business accounts the third most common product. For now, lending, investment and savings products remain less common, possibly due to the increased cost these products may involve for the bank. It makes little sense for a provider to begin offering interest on savings or account balances, without launching a profitable product to offset further losses.

The distribution of product types suggests that development is focused on expanding the initial specialisation, such as Starling adding a business account with very similar functionality to its existing consumer current account or Monzo converting a prepaid account into a current account, enabling the provider to offer an enhanced product with more features.

Channels

Looking back at the digital evolution of traditional banks, there has been a clear development from branch banking to internet banking and now to mobile banking. While traditional banks have gradually embraced technology over the years, digital-only banks have typically undergone the reverse journey, starting with a pure mobile offering (e.g. Starling) with internet banking developed and offered only later, and only by some (e.g. N26).

Still, none have yet launched dedicated branches to complement virtual channels. While this, mainly one-channel, approach limits the audience they can currently target, their addressable market is expanding dynamically with smartphone penetration booming as younger generations embrace technology at an ever faster pace. Also, focusing exclusively on digital channels enables them to gain a competitive edge in this area over their incumbent rivals.

With incumbent players increasingly closing branches and instead focusing on digital offerings, digital banks are unlikely to embrace branch-banking. This is especially pertinent when coupled with the cost of maintaining branches and the losses some of these FinTechs are making.

However, with many banking customers still demanding a personal point of contact, some digital banks have been looking to explore the omnichannel/phygital channel approach. Self-service, or partnered, banking branches are potential options, where customers can access the same, or similar services as those provided in-branch by incumbents. For instance, Starling’s recent partnership with the U.K Post Office has now enabled the digital bank’s customers to deposit and withdraw money at all the post offices in the country.

Onboarding

A significant similarity between digital banks, and typically a differentiator from traditional banks, is the swift and seamless onboarding process.

While some traditional banks also claim to offer an online onboarding experience, that experience has hardly deserved the “online” descriptor as although customers can typically enter all their information online, the process would then require the customer posting the signed contract to the bank, or worse, having to visit a branch, defeating the point of online onboarding.

On the other hand, with a branch-less bank comes branch-less onboarding where customers can open a new account directly from within an app, usually by providing a photo of some ID, documents with the customer’s address on it, and sometimes a video confirming the customer’s identity. It typically only takes minutes from start to finish, with the whole process managed online.

Positioning

Unlike their current product offering, there is significant variety in how these players market their propositions. Some emphasize the comprehensiveness of their current offering (e.g. Starling prides itself on being selected as the Best British Bank in 2018), while others invite customers to join them on the road to become the bank of the future (e.g. Monzo). The remaining three players primarily target a narrower segment in global citizens and focus their messaging on specific features of their proposition; N26 and Revolut position themselves as the go-to bank for frequent travellers, while TransferWise focuses on marketing its cross-border payment features to those looking to send and receive money internationally. In a market characterized by strong competition and lack of differentiation, messaging might prove to be the difference between success and failure.

Final thoughts

Digital banks are becoming increasingly common, helped by the increased popularity of mobile banking and a perceived better user experience but in their journey towards an ever-increasing product offering, there is the danger for FinTechs to develop offerings that are mile wide but only an inch deep in an attempt to reach parity with high-street banks. On the other hand, something as simple as the colour or shape of the payment card may very well be the ultimate USP in a market where the actual financial product offering lacks diversity.